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What are Priority Debts in Bankruptcy?

  • By: John Clark
  • Published: August 6, 2021
What are Priority Debts in Bankruptcy?

When filing for Bankruptcy, one of the very first things a debtor does is to compile a full list of their debts. There are many different types of debts, which in bankruptcy are largely classed into two categories: secured debt and unsecured debt.

Secured debts are debts that are guaranteed by collateral (usually property), on which the creditor has a lien. This means that the creditor has an ownership interest in the collateral property that remains in effect until you pay off the debt. If you fail to pay the debt, your creditor can repossess or foreclose on the collateral property. Two common examples of secured debts are mortgages and auto loans. In both cases, failure to pay the loan may result in losing the collateral property (i.e., your house or your car).

Unsecured debts are debts that are not secured or guaranteed by a property lien. Most debt is unsecured debt. Examples include credit card debt, medical bills, personal debt, gym memberships, utility bills, and payday loans. During the course of any bankruptcy, most unsecured debts are discharged, meaning the debtor is no longer responsible for paying the full debt under pre-bankruptcy terms. Instead, creditors will ideally be repaid at least in part through the bankruptcy process (for instance, through liquidation of assets in a Chapter 7 Bankruptcy, or through repayment plan installments in a Chapter 13 Bankruptcy).

However, repayment depends on the type of unsecured loan in question. Bankruptcy law differentiates between two types of unsecured debt: priority unsecured debt and nonpriority unsecured debt.

Priority unsecured debts (or “priority debts”) are given precedence over nonpriority unsecured debt. This means that priority debts get paid in full before nonpriority debts can get paid at all. If there is any money left over after the full repayment of all priority debts, it is divided between all of the nonpriority creditors on a pro-rata basis (meaning they each receive an equal percentage of the remaining funds).

Priority debts are usually chosen based on the level of “public good” that is served by repaying them. They include:

  • Child support payments
  • Spousal support/alimony payments
  • Certain types of income tax debt
  • Payroll and sales tax debt
  • Criminal fines and fees
  • Awards from personal injury or wrongful death suits that resulted from drug or alcohol intoxication
  • Overpayment of certain government benefits.

In addition to being top priority in repayment, these priority debts are often non-dischargeable. This means that you will still be responsible for paying the balance of the debt, unlike most other unsecured debts that are wiped out (or discharged) through bankruptcy.

This all may seem somewhat complicated and hard to understand, like many of the rules about bankruptcy. However, the right bankruptcy attorney can show you that it doesn’t have to be that way. Bankruptcy is an incredibly useful tool that can and should be navigated for the benefit of those who need it. Despite many misconceptions about bankruptcy being a financial death sentence, filing for bankruptcy can actually offer freedom to those who have found themselves with unmanageable debt. It gives thousands of Americans each year the chance to get a financial fresh start, without the burden of unpayable debt hanging over their heads.

Are you or a loved one overwhelmed with debt? Are you thinking about filing for bankruptcy in Birmingham, Alabama? Birmingham Bankruptcy Attorney John Clark is here to help. Call (205) 506-3354 for a Personalized Case Evaluation on your case today.

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